SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings affirms the following City of San Luis Obispo, California
(the city) ratings:

--$14 million lease revenue bonds series 2006 at 'AA';

--$13.5 million City of San Luis Obispo Capital Improvement Board lease
revenue bonds series 2009 and 2012 at 'AA';

--Implied general obligation bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The lease revenue bonds are secured by lease payments made by the city
to the board. The city has covenanted to budget and appropriate the
lease payments, subject to abatement.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: The city maintained strong reserves
throughout the downturn and has added to fund balance as revenues have
recovered. Expenditure pressures are prudently managed and general fund
operations are balanced.

REVENUE CYCLICALITY: Revenues are somewhat volatile due to reliance on
economically-sensitive sales and transient occupancy taxes, which
accounted for about one-half of general fund revenues in fiscal 2013.
This concern is offset by the city's ample reserves and history of
expenditure discipline.

EXCELLENT FINANCIAL MANAGEMENT: Active budget monitoring, comprehensive
financial policies and the use of long-term budget planning provide a
strong framework for managing through unexpected budgetary problems. The
city has regularly met its policy of maintaining reserves equal to at
least 20% of general fund spending.

LOW DEBT BURDEN, HIGH PENSION COSTS: The city's sparing use of bonded
debt is a credit positive, although San Luis Obispo does have meaningful
unfunded pension obligations that require increasing annual benefit
contributions from the city's operating budgets. The other
post-employment benefit (OPEB) liability is modest.

FUNDAMENTALLY SOUND ECONOMY: San Luis Obispo is the economic center of
California's Central Coast region with a tourism-, education- and
government-driven economy. Employment growth has outpaced the state and
nation in the wake of the recession and unemployment rates are below
average.

RESILIENT TAX BASE: Assessed value (AV) remained fairly stable in this
older, slow growing and more established community during the downturn,
and has returned to modest growth.

San Luis Obispo faced significant declines in economically sensitive
revenues during the recent recession and has benefited from a strong
rebound over the last three years. Total general fund revenues increased
by almost 16% between 2010 and 2013, and have been bolstered by a robust
sales tax recovery. The city has also increased reserves during this
period; unrestricted fund balance reached a healthy 28.5% of general
fund spending at the end of 2013.

Fitch views the city's strong reserves as an important offset to its
reliance on economically sensitive revenues. Sale and transient
occupancy taxes account for nearly half of general fund revenues and
dropped sharply during the recent downturn. The city drew on reserves to
mitigate this funding loss and also made significant reductions in
expenditures. Subsequent expenditure increases have generally been
limited to capital and other one-time uses, as the city has sought to
control labor cost inflation. Notable achievements towards this goal
have included the shift of employee pension contributions back to
employees, employee responsibility for all health insurance cost
increases, and the avoidance of across-the-board pay adjustments.

A local sales tax measure adopted in 2006 supports the city's strong
financial position, raising approximately $6.5 million in revenues
annually. The measure expires in 2015 and its renewal will be considered
by city voters in November 2014. Support for renewal appears strong, but
the city has prudently begun contingency planning in the event the tax
is not extended.

RISING PENSION COSTS PRESSURE BUDGET

The city participates in the state-sponsored CalPERS defined benefit
pension plan and faces ongoing budget pressures from rising contribution
rates. Rate increases are expected to accelerate over the next five
years to address the plan's sizable unfunded liabilities, and further
increases are under consideration. Pension costs in 2013 were equal to a
high 28.5% of governmental expenditures and will likely rise as a result
of these changes. This figure includes costs borne by the city's
enterprise funds, which account for roughly one-third of government-wide
operating expenses and are self-supporting.

The city has sought to reduce the impact of pensions upon its general
fund through shifting costs to employees, introducing new benefit tiers,
and setting aside reserves in anticipation of rate increases. High
pension costs are also mitigated by limited long-term obligations in
other areas. Overlapping debt is a low 0.8% of AV or $1,093 per capita
and both capital needs and OPEB liabilities are limited. Amortization of
direct is above average with 72% of bonds repaid in 10 years.

NOTABLE FISCAL OVERSIGHT

San Luis Obispo's financial management is particularly strong. Financial
management and elected officials actively monitor budget performance
across the city's biennial budget cycle and have made adjustments to
reduce expenditures in the face of revenue declines. While the need to
negotiate major spending reductions with labor can lead to a lag in
rebalancing budgets, the city's budget process includes long-term budget
planning that focuses policymakers' attention on the need to align
on-going revenues and expenditures to achieve structural balance.

ECONOMIC HUB; STABLE ECONOMY

San Luis Obispo, a city of about 46,000 people, is the economic center
of California's central coast region. The city's biggest industries are
tourism, higher education and government. The city is also a regional
retail hub and is home to the California Polytechnic State University
with about 20,000 students. The city benefits from slow, steady
population growth and has experienced strong employment gains after
steep losses during the downturn. Its December 2013 unemployment rate of
6.2% was lower than both state and national averages, while employment
levels now exceed pre-recession peaks. The city's stability is also
reflected in its tax base, which declined by less than 2% in 2011 and
2012 before returning to growth in 2013.

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